Comparison Between Uniform Tariff and Progressive Consumption Tax in the Chinese Automobile Industry*

Abstract

This paper studies the protectionist effect of a non‐trade policy — a consumption tax — compared to that of a tariff on the Chinese automobile market. Our empirical findings suggest that both the consumption tax and the tariff can protect domestic automakers’ market shares, but they can only shift a small portion of demand from imported cars to domestic cars. This demand exclusion is caused by the weak substitution between imported cars and domestic cars, and it is the underlying reason for the welfare loss caused by both the tariff and the consumption tax. A change in the consumption tax favorable to domestic manufacturers is equivalent to an additional 28% tariff, beyond the explicit 25% tariff, in terms of its protective effect on domestic manufacturers’ market shares.